Centre flags deflation concerns in economy

Move seen as an indirect push for rate cut by RBI

 Indirectly stepping up demand for an interest rate cut by the Reserve Bank of India (RBI), the government on Wednesday flagged deflation concerns after the economy slowed to 7 per cent in the first quarter (April-June).

“Overall, the economic growth is moving in the right direction, although its pace is still below what the economy needs... one real challenge that looms ahead is not appearing to be the price inflation, but the possible price deflation,” Chief Economic Advisor Arvind Subramanian said.

Deflation occurs when the inflation rate falls below zero per cent, and it is worrisome because money becomes dearer in these times.

“If you look at price growth based on GVA deflator, it’s almost flat — up 0.1 per cent. And, in case of prices based on GDP deflator, while the actual estimate suggests 1.7 per cent, it could be even lower. We are closer to deflation territory and far away from inflation territory. One of the real challenges, in terms of prices, is that perhaps we must be focused on price deflation rather than price inflation,” he said.

Subramanian, however, sidestepped a question on whether the RBI should cut interest rates to perk up the economy when inflation had gone so low.

The North Block has not insisted on rate cut ever since RBI Governor Raghuram Rajan made a request in writing to resist from making such a demand. The RBI in its annual report, released last month, had said interest rate cuts should not be seen as “goodies” that it gives out after “public pleading”.

“It is not the role of the central bank to elevate sentiments unduly, and to deliver booster shocks to the stock market so that it can soar for a while, only to collapse when reality hits,” Rajan had said.

Rate cut cycle

The RBI has cut rates thrice by 25 basis points each so far in 2015, and Rajan maintains that the RBI has not done away with a rate cut cycle, but will watch certain data points before taking any decisions.

Subramanian, however, said that lower inflation, lower oil prices and lower rates could lift the economy further in coming times.

“I don’t know how the economy will evolve exactly. But the combination of oil price decrease, the fact that macroeconomic stability, the fact that reforms (are being undertaken), the fact that inflation is down and interest rates have come down... all of these should contribute towards annual growth that has been forecast in the Survey. Higher growth should translate in higher job creation.” he said.

He also said that the GDP numbers should be looked at in totality. He was pointing to a decent 35 per cent growth in the indirect tax collection in the first quarter.


Economy of Concerns


The government expresses deflation concerns
Economy has slowed to 7% in Q1
CEA says economic growth in right direction, yet slow
Indirect clamour for rate cut on RBI intensified